Greek swaps auction sets $2.5bn payout for lenders

An auction to set the payout due to holders of Greek default insurance fixed a
fair value price of 21.5 cents (18p) in the euro for Greek bonds, final
results showed.

The final price, or recovery rate, in the CDS auction gives the best guidance yet to the value of new Greek bonds issued in last week's debt swap deal.Photo: AP

Reuters

6:17PM GMT 19 Mar 2012

This price, known as a recovery rate, means holders of credit default swaps (CDS) on Greek debt will receive a total payout of $2.5bn (£1.6bn), according to Reuters calculations.

The results of the auction show investors fear for Greece's financial future even after a debt restructuring and aid packages.

The final price, or recovery rate, gives the best guidance yet to the value of the new Greek bonds issued in last week's debt swap deal to put Greece on a firmer footing.

"These bonds are trading at a huge discount and this tells you the market has doubts about whether Greece will be able to cope but that's been known all along and this auction doesn't change this," said Commerzbank rate strategist Christoph Rieger.

The new Greek 30-year bond was quoted in the secondary market on Monday at about 21 cents in the euro and the new bond maturing in 2023 at about 28 cents, but with a wide variation between buying and selling prices in thin trading.

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Holders of the CDS (credit default swaps) will receive a cash payout equal to the difference between the recovery rate and the full face value of Greek debt.

The auction is expected to draw a line under fears that activation of the CDS contracts would spark a widespread banking crisis.

The International Swaps and Derivatives Association ruled earlier this month that Greece had triggered the payment on the default insurance contracts by using legislation that forces losses on all private creditors.

The auction and the ISDA's ruling are good news for investors who bought insurance against default on the bonds of other weaker eurozone countries such as Spain and Portugal, because it implies they would get paid if those countries run into trouble.

Credit default swap contracts were blamed for worsening the 2008 financial crisis and there have been fears that they could start a chain reaction with unpredictable consequences in the eurozone debt crisis.

The payout on the Greek swaps is expected to total around $2.5bn, a small sum compared to the losses investors have already taken on money lent to Greece.

In order to secure a desperately-needed financial bailout, Greece cut €100bn (£83bn) off its public debt by forcing private creditors to swap their original Greek bonds for new ones worth substantially less.

But secondary market pricing shows investors believe Athens will need another debt restructuring as austerity steps tied to the aid package might tip the country further into recession, making it difficult to meet deficit targets set by its lenders.

"The market is pricing in an elevated probability of a second restructuring from Greece," said ING strategist Alessandro Giansanti.

"This will not vanish in coming months because the market wants to see data from Greece and wants to be confident it will be able at some point to have at least flat growth and positive growth to reduce the deficit."